The Curious Psychology of Groupon

Groupon is a fascinating company, and perhaps an even more fascinating as an example of various methods of social influence available to online companies today, and their intended and unintended consequences.  Groupon’s meteoric growth had everything to do with three very powerful techniques of social conditioning: perceptual contrast, scarcity, and social proof.

  • Perceptual contrast.  The significant discounts highlighted on Groupon (e.g., $39 for an $80 dinner cruise!), make an item much more attractive than if the discounted price were offered in isolation (e.g., $39 for a dinner cruise!).  People love getting a deal, and if the perceptual contrast is great enough, they may even buy something they didn’t want in the first place (e.g. a dinner cruise).
  • Scarcity.  People hate missing out on something, and it’s been proven that people are more likely buy if they feel that they may soon lose the opportunity to do so.  This is the reason that “for a limited time only” is such an effective advertising call to action.  While many Groupon deals are “uncapped”, i.e. everyone who wants the deal can get it, each deal is open for only a certain amount of time, thereby stimulating urgent buying behavior.
  • Social proof.  One means people use to determine correct behavior is by watching other people’s behavior.  By publicizing how many people have signed onto an offer so far, Groupon provides a valuable and persuasive signal that others have made the decision to buy, so you should too.  Kleiner Perkins partner Aileen Lee wrote a great piece on social proof here.

Successful consumer-facing internet companies almost always rely on at least one or two forms of social influence (e.g., social proof and reciprocity for Facebook, scarcity and perceptual contrast for Gilt Groupe), but Groupon was able to hit on a model that brought to bear three very strong techniques in concert.

While Groupon’s rise is attributable to the strong psychological influence of its business model, their difficulty in driving strong repeat visits for their merchants – a consistently cited challenge and one at the crux of why a merchant would run such a deeply-discounted promotion in the first place – is also a consequence of psychological factors at play.

The theory behind running an offer with Groupon is that once a consumer has purchased once, they should be more likely to buy again at your establishment.  Indeed, consumers should on average do this even in the absence of reminders or follow-up marketing assuming their first experience was good.  Anecdotal evidence suggests that this isn’t the case, or at least that it’s often not the case.  Some have argued that the reason why merchants don’t see more follow-up traffic is that the consumer relationship belongs to Groupon, not to the merchant.  I’m not sure this is entirely correct.  While the purchase decision happens on the Groupon platform, at the end of the day the consumer is not receiving a Groupon sandwich, a Groupon haircut or Groupon eye surgery.  There is a relationship created between the merchant and consumer.  The problem is that from the outset it is a fundamentally adversarial relationship.  The reason it’s adversarial stems from another powerful method of social influence.

Sales professionals will often use a compliance technique where they play the role of the customer’s “champion”, taking the side of the buyer in order to secure them a good deal.  For example, a car salesman will appear to “do battle” with his boss at the dealership in order to secure a good price for a new car buyer, thereby putting himself on the side of the customer and securing his trust.  The psychology of Groupon works in a similar way – Groupon the deal promoter collaborates with the customer to secure an advantageous deal.  The merchant, meanwhile, is cast in the role of the parsimonious boss from whom concessions are extracted.  While the marketing copy of a Groupon deal will tout the attractiveness of the merchant’s goods/services (and it’s of course in Groupon’s interests to do so), the underlying framework of the deal is that the consumer is getting something, Groupon is enabling the consumer to extract that value, and the merchant is (reluctantly) providing that unbelievably good deal.

Adding to the effect, there is another collaboration going on: because a Groupon isn’t “activated” until a minimum number of people sign on, each consumer is also in collaboration with the others in opposition to the merchant.  While this group activation feature is an important element in providing valuable social proof, it has the unintended consequence of adding to the dynamic of “us versus the merchant”.

This deal mentality helps explain an oft-reported negative consequence of Groupons – the bad and overly demanding behavior by normal consumers who should be pleased by, and grateful for, the deal they’re getting.  It’s not that Groupon consumers are inherently more rude, greedy, condescending or discontented than anyone else, as some have assumed; it’s that they’re conditioned for this behavior by the inherently adversarial nature of the deal itself.

There is one final reason why merchants have perhaps had trouble getting Groupon customers to return to their businesses: shame.  In the Groupon model, consumers put themselves in the position of extracting value from merchants who, almost by definition as Groupon offerers, are struggling to meet their sales objectives or fill excess capacity.  Consumers are made aware by Groupon itself that they are receiving goods and services from these (struggling) merchants at deeply discounted prices – 50-90% off retail price, as advertised by Groupon.  As humans, we are all conditioned at an early age to value reciprocity and fairness.  After voluntarily entering into a collaboration with Groupon and other consumers to extract value from a merchant; after observing or even participating in bad behavior directed at this same overwhelmed merchant; and after making away with our deeply discounted muffins, eyelash extensions or bellies full of food, is it really any wonder that consumers are reluctant to return to the scene?

The principal power of a more social and interactive web is that as individuals and consumers we can each see what everyone else is doing.  Individual decisions become group decisions, and individual actions potentially become herd behavior.  Individual and group psychology, and their attendant compliance techniques, can be tapped to drive incredible growth, influence decisions and activity, and ultimately build big businesses.  On the other hand, these same techniques can have serious adverse consequences that might not be readily apparent at the outset.  While the new internet is a data-rich internet, at the end of the day we are all humans and as such act and react in ways that are emotional, illogical and often surprising.

About Matt Krna
I'm a growth stage VC at SoftBank Capital, focusing on Internet and New Media investments. I also love advising early stage companies in these sectors. Particular areas of interest for me include social media, mobile applications, online marketing, and the application of data and analytics to solve complex business and social problems. Views expressed here are my own.

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